Gloria Macapagal-Arroyo

President of the Republic of the Philippines 2001 - 2010

Understanding the OFW Phenomenon

Perspective

Filipino Overseas Workers have been hailed as "national heroes" by their countrymen and countrywomen. The accolade is well-deserved. OFWs have given their families incomes with which to lift their living standards and our country with better opportunities for dealing with problems of instability associated with home conditions and international recessions.

This paper takes a look at the OFW phenomenon, its impact on Philippine families and the Philippine economy as a whole, and its significance to Philippine economic development in the long-run.

I. The OFW Phenomenon

A. Employment

From a national viewpoint the first impact of Filipinos working overseas is on domestic unemployment. They reduce the size of the pool of the unemployed, thus relieving the national society of some of the pressure to find a complete solution to this very serious problem. Every man or women finding a job abroad is one person less of our unemployed countrymen and countrywomen.

The Table below shows the number of Filipinos working overseas in the period 2005-2008 (in thousands).

Source: National Statistical Coordination Board, 2009 Philippine Statistical Yearbook, Manila. Table 11.4.

Over the three-year period, OFWs increased at an average rate of about 15 percent per year. This is much higher that the highest annual rate of employment increase ever recorded in our domestic economy, which is something like 6 percent, when industrial activity was at its most dynamic phase.

The sex distribution is only slightly in favor of the male, an indication that the female Filipino worker has indeed arrived, and is now for all practical purposes the co-equal of the male worker.

In the last two years 2008 and 2009, many have expressed fears that the global meltdown and recession might have impacted adversely on employment conditions in countries favored by OFWs. The fears were well-founded. However, employment authorities have stilled those fears, declaring that the flow of OFWs to these countries has not abated, has even increased in a few cases. This is welcome assurance.

Incidentally, there is another set of statistics on OFWs, which shows smaller numbers of OFWs. This poses a problem not just of what set to use, but about the credibility of the numbers themselves. The fact of the matter is that there is no single agency -- not the Department of Labor and Employment, not the Philippine Overseas Employment Agency, not the Bureau of Immigration and Deportation – that is responsible for the compilation of official statistics on OFWs. Inconsistencies of statistics compiled by various agencies are therefore not unexpected.

B. Remittances

The Table below shows the remittances of earnings of OFWs by Continent of Origin over the period 2004 – 2008 (in million US dollars):

Source: National Statistical Coordination Board, 2009 Philippine Statistical Yearbook, Manila. Table 16.5, except for 2006 and 2009 which came from the Bangko Sentral ng Pilipinas.

The remittances grew by an average 18 percent per year over the 5-year period, an amazing speed under any circumstance. The richest source of remittances is America, which contributes an average of some 55 percent of total each year, followed by Europe and the Middle East, which contribute about 15 percent each, and thirdly by Asia, which contributes about 10 percent. The remaining 5 percent of total remittances come from Oceania (including Australia) and Africa and other unspecified countries.

This point needs further comment. Going by the amounts of remittances, the vast majority of OFWs are in America and the notion held by many that OFWs are in the Middle East or Asia is not well-founded. Further, that OFWs consist mostly of construction workers and domestic helpers is also not so, since the majority of those employed in America are in fact professionals, such as medical doctors and nurses. Taking nothing away from our workers in Asia and the Middle East, who are worthy ambassadors of their country both as workers and as human beings, are we not downgrading our professionals a little bit?

Dividing total remittances by total OFWs, we find that the average remittance per OFW was $8,055 in 2005, $8,423 in 2006, $8,271 in 2007, and $8,205 in 2008. The average remittance did not vary too much, a reflection of tranquility and stability in those years in the countries where the OFWs worked.

It would have been instructive to know the average remittance per region or continent of the world, but no figures are available for the number of OFWs in those regions or continents.

C. Impact on Family Welfare

These remittances imparted tremendous purchasing power to OFW families, adding benefits to those situated in comfortable circumstances and lifting those of them in poverty out of that abyss. This impact acquires fundamental importance when seen against the backdrop of economic recession: at a time when most families are reining in expenditures out of fear of losing their jobs in the future, middle-income and low-income families in the Philippines maintain their accustomed levels of family expenditures at an uninterrupted pace.

II. Economy-Wide Impacts

A. Impact on Banking

OFWs remittances make another contribution to the economy. OFWs transmit their earnings through the banks, who give the peso equivalents of the remittance to the OFW families. Now banks buy and sell foreign currency as a part of their day-to-day operations. The same dollars they buy from OFWs at the bank's buying rate, the banks sell to business people, travelers, etc., at the bank's higher selling rate, making a profit in the process. At the end of the day, the banks are better off, from the buying and selling of the dollars that OFWs remit to their families. .This also provides the answer as to why banks scour the whole world searching for OFWs and offering them special services to assure the delivery of their remittances.

B. Impact on Imports

Prominent among purchasers of dollars from the banks are the importers whose need for dollars is normally supplied by the earnings of exporters. When exports are down, however, as when markets abroad contract because of a recession, the dollar supply diminishes, and importers are not able to carry out their business. This can create a shortage in raw materials or even in machinery for production, slowing down production, creating an import gap in local markets, pushing prices up. To a great degree, OFW remittances prevent this from happening.

C. Impact on the International Reserves

Banks with overnight loans with the Bangko Sentral ng Pilipinas might decide to pay their loans with dollars. Following policy, particularly on exchange rate stabilization, the BSP might allocate these dollars to the country's international reserves. Alternatively, if it does not receive dollars directly, the BSP may swap some pesos for the banks' excess dollars, and commit these dollars to the same kitty, the country's international reserves.

D. Impact on the Foreign Exchange Rate

It is obvious that OFW remittances also contribute to the stabilization of the exchange rate. Their augmentation of the dollar supply is an assurance to the market that dollar requirements will be met, that any speculative attacks on the peso will not prosper. This prevents the exchange rate from sharply fluctuating.

III. Concerns over Overseas Employment

A. Social Costs

The employment abroad of an older family member, such as a father or a mother, can create a vacuum of leadership and companionship in the family, leaving family members to fend for themselves. For the children this can lead to the acceleration of the maturation process, which is a good thing, but in practice it leads to generally undesirable activities -- absences or tardiness from school, integration into unpleasant company, and outright delinquency. For the other older family member left behind, the mother or the father, the prolonged absence of the other spouse can exact a toll on the physical or mental health of the spouse left behind. The result can be a weakening of family ties, or a splintering or even a break-up of the family itself...

The total social costs of developments of this kind, increased by multiples in local OFW communities, is difficult to calculate.

The cost can go up when the sufferings of the OFWs themselves in adjusting to a new environment are taken into account. For some, failure to adjust has led to the loss of life itself. To the hard-headed analyst, however, all these sufferings have been "factored out" in the wage received, meaning that the OFW did not mind the sufferings so long as he received the agreed wage. The analyst has a point, but the fact remains that if there was a domestic alternative, low wage and all, the OFW might decide to stay home.

B. Pedro's Complaint

Critics have called the Government to task for adopting a so-called "labor export" policy, implying that the Government is purposefully "exporting" labor. The criticism represents a misunderstanding of the phenomenon.

When a person goes overseas to work, he does so in pursuit of his or his family's best interest. His relatives and friends support him for the reason if for no other that they are to be the beneficiaries of such an action. The Government supports him, too, first because our laws acknowledge the citizen's right to travel, and further because such foreign employment is likely to be beneficial to the person, his family and the country as a whole.

There is another reason why the Government supports overseas employment. It prevents the social volcano of domestic unemployment from erupting and gives the Government much precious time to solve it. Solving the unemployment problem is by any measure not easy; it is almost equivalent to solving the problem of underdevelopment itself. It requires the participation and leadership not just of the Government but also of captains of industry, society's members who have the capacity, even members of the labor force themselves. As the unemployment – and underdevelopment – problem is solved, OFWs will find its attractive to begin coming home, again using their own judgment, to join in the acceleration of the transformation of their country. When that point is reached, the phenomenon of OFWs will no longer be of interest.

In the meanwhile, of course, while the domestic unemployment issue is not fully solved, overseas employment is a sensible companion measure to fall back on.

IV. A Conceptual Consideration

A. GDP vs. GNP

Every now and then the Government reports to the people achievements made in the development of our economy, using both GDP (Gross Domestic Product) and GNP (Gross National Product) as measures of development. For instance in 2007, GDP was P6,647.3 billion with a growth rate of 7.1 percent and GNP was P7,227.3 billion with a growth rate of 7.5 percent.

What's the difference between the two measures and what is the significance of this difference? GDP does not include income from overseas employment. GNP does.

The United Nations favors GDP rather than GNP for the measurement of economic growth for the reason that GDP refers to the domestic economy, which is the entity that needs to be developed, whereas GNP refers to the income of nationals wherever it was earned, which includes income earned in other economies, not the economy of interest. . Changes in GDP are a measure of the rate of growth of the domestic economy. Changes in GNP are a measure of the rate of change in the welfare of nationals, wherever they are.

On the other hand, for the measurement of national welfare, GNP, which is now called GNI for Gross National Income, might be superior to GDP, for after all the end goal of economic development is enhancement of human welfare. At the same time, however, "human welfare" is a nebulous concept. Compared with "economic growth," which refers only to growth of output, an easily measurable quantity, "welfare" does not even refer to welfare on the basis of income; it is welfare inferred from "consumption," an altogether different matter.

B. Less Philippine Employment Abroad, More Foreign Investments Here

The technical relation between GDP and GNP is given by:

GDP + NFIA = GNP

where NFIA stands for "Net Factor Income from Abroad," which means, the total income of all Philippine labor and Philippine investments abroad less the total income of all foreign labor and investments in the Philippines.

Obviously, if the former is greater than the latter, NFIA will be positive, then GNP will be greater than GDP. Conversely, if the former is less than the latter, NFIA will be negative and GNP will be less than GDP.

In the Philippines, GDP has been smaller than GNP in the last few decades, for the reason that NFIA has been positive all these times. The Table below shows the numbers.

NSCB, 2009 Philippine Statistical Yearbook, Manila. Table 3.1.

*Given that in 2008 OFWs remitted a total of P788.5 billion (the equivalent of the $16.427 billion remitted converted at the exchange rate of P48), this number (P827.0 billion) implies that not only did foreigners not remit anything to their home countries, they brought in "remittances" to the Philippines instead, in the amount of P38.5 billion—an investment inflow, perhaps? (But that should show in the Capital Account, not in the Current Account).

A positive NFIA is an indication that our overseas employment program is a "success" with OFWs making "huge" remittances; and that our "foreign" investment program is a "failure," with foreigners in the Philippines making "small" remittances to their home countries, in turn an indication that there are few foreign investors in our country.

Looking into the future, as the development of the domestic economy accelerates, more and more labor will be required to operate it, and more and more investment including foreign investment will be needed to fuel it. The first development will attract OFWs back to the Philippines, reducing their remittances; while the second development will mobilize increasing amounts of foreign investment, enlarging remittances for profit, consultancy services, etc., of foreign business people operating in the Philippines. At some point in time, NFIA will become negative , GDP will be greater than GNP, and, we hope, the growth rate of GDP will be greater than the growth rate of GNP.

Overseas employment is not important in an economy that has reached that stage of development that it is able to assure every Filipino an abundant and wholesome life. Where its importance lies is in the powerful boost it gave us to reach that stage.